Auditing Ii Question Paper
Auditing Ii
Course:Accf 434
Institution: Kenya Methodist University question papers
Exam Year:2008
KENYA METHODIST UNIVERSITY
END OF FIRST TRIMESTER 2008 EXAMINATION
FACULTY : BUSINESS AND MANAGEMENT STUDIES
DEPARTMENT : BUSINESS ADMINISTRATION
COURSE CODE : ACCF 434
COURSE TITLE : AUDITING II
TIME : 3 HOURS
INSTRUCTIONS:
• Answer Question ONE and any other THREE Questions
• Show all your workings
Question 1
Modern approach to auditing called risk-based auditing is a most welcome development.
a) Define the term risk-based auditing. (3marks)
b) Explain what is meant by the terms:
i) Inherent risks
ii) Control risk
iii) Detection risk (6marks)
c) List the factors, which the auditors should bear in mind when assessing the inherent risk and control risk (audit risk of a company). (10marks)
c) Explain why there has been an increased use of risk based auditing approach in recent years and what advantages for the auditors from the adoption of such an approach.
(6marks)
Question 2
a) List and explain five financial indicators which may indicate that a company is not a going concern. (10marks)
b) Describe any further investigations you would carry out to decide:
i) Whether the company is going concern and
ii) Whether it has a reasonable chance of recovering from the going concern
problems. (15marks)
Your answer should include details you should carry out in verifying the company’s profit and cash flows forecasts
Question 3
You are auditing the financial statements of Twendelee Trading Co. Limited a listed company, for the year ended 31st October 2006. The audit assignment partner has asked you to consider the auditors responsibilities for identifying subsequent events. Also, he has asked you to describe the audit procedures, which examine subsequent events. He has suggested that an example of one point in answer to part (b) below would be:
“checking accounts receivable and cash received after the year ended to determine the realizability of accounts receivable balances at year end and highlight doubtful balances on the accounts receivable ledger”
The audit was completed on the morning of Friday 6th December f2006. It is proposed that:
1. The audit report is signed on Friday 20th December 2006.
2. The financial statements are sent to shareholders on Monday 6th January 2007.
3. The company’s annual general meeting will be held on Wednesday 29th January 2007. At this meeting the shareholders will vote to approve the financial statements.
You are required to:
a) Consider the auditor’s responsibilities for detecting material subsequent events in the periods:
i) 31st October to 6th December 2006
ii) 6th December to 20th December 2006
iii) 20th December 2006 to 6th January 2007
iv) 6th January 2007 to 29th January 2007
v) After 29th January 2007 (10marks)
b) The international standards on Auditing (ISA) specifically prohibit auditors from advertising of their professional services except under certain circumstance.
Explain any five circumstances under which auditors can advertise their services.
(10marks)
c) There are basically two techniques available to the auditor for auditing through the computer. Explain each of the following technique clearly differentiating them:
i) Test data
ii) Interrogation software. (5marks)
Question 4
Mr. Sammy and Mr. Joseph are each 50% shareholders and the only directors of S & J limited; a company which operates a building contractor involved in civil engineering contracts which frequently take more than one year to complete. The turnover of the company in the year ended 31st March 2007 was in the region of sh.1,200 million. The company has suffering cash flow problems in recent times. Mr. Sammy and Mr. Joseph have disagreed on the management policies of the company. As a result of this disagreement, Mr. Joseph has agreed to sell his shares to Mr. Sammy and has resigned as a director with effect from 31 March 2007. The consideration of the shares is to be fixed by a valuation of the shares based the audited accounts for the year ended 31 March 2007.
You have been appointed the investigating accountant to review the valuation of the shares. Mr. Sammy and the auditors of S&J limited have agreed to cooperate fully.
As the investigating accountant, detail those matters which you would pay particular attention in carrying out your review. (25marks)
Question 5
Coogee ltd is a medium sized engineering company with an annual turnover of £23million. Most of its sales are on credit. At its financial year end 31 December 2007 its sales ledger contained 2,000 accounts with balances ranging from £50 to £10,000 and totaling £2,300,000. As a staff member of coogee’s external auditors you have been assigned to the audit provision for bad and doubtful debts which has been set as £120,000. Your initial enquiries established that £80,000 relates to the provision against specific bad and doubtful debts and £40,000 is a general provision determined as a percentage of overdue debtors with an increasing percentage being applied against the longest overdue accounts.
You are aware that International Standard on Auditing (ISA) on Audit of accounting estimates is likely to be relevant to your audit of the provisions for bad debts.
Required:
a) Explain the approaches adopted by auditors in obtaining sufficient appropriate audit evidence regarding accounting estimates. (5marks)
b) Describe the procedures you would apply in verifying the general provision for bad and doubtful debts. (12marks)
c) Describe the procedures you would apply in verifying the specific provision for bad and doubtful debts. (8marks)
Question 6
a) Mautz and Sharaf suggested a list of postulates of auditing that is matters assumed to be true and taken for granted. Explain any four postulates of auditing assumed to be true but taken for granted. (8marks)
b) IN making a decision regarding an Auditor, a High Court Judge must consider the legal principles which emerged in the past cases. Such cases include; Kingston Cotton Mill company, Jeb Fastener case, ultramares case and London & General Bank case.
Explain the critical issues from the above cases. (7marks)
c) Explain any five situations which may compromise auditors’ independence.
(10marks)
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